Grzegorz Cieslik, managing director at Q Securities Luxembourg, a branch of a Polish brokerage firm, explains the remarkable growth of the company in an interview with Paperjam. Since launching its Luxembourg branch on 1 October 2020, Q Securities has positioned itself as a key provider of independent depositary services for alternative investment funds (AIFs). In addition to its services in sectors such as private equity, real estate and infrastructure, Q Securities is preparing to offer depositary functions for crypto investment funds as part of its strategic growth. The firm recognises Luxembourg’s robust financial reputation and regulatory framework as critical factors attracting institutional investors amidst the volatility of digital assets. To further solidify its position as a leading hub for crypto funds in Europe, Cieslik advocates for a broader pool of service providers and improvements in the transparency and efficiency of the licensing process.
Kangkan Halder: Could you give a brief overview of the growth in services and business in Luxemburg since you first received a full depository licence in 2020?
Grzegorz Cieslik: We started our Luxembourg branch operations in April 2021 and began with four clients. In 2022, we signed another 22 clients, ending the year with 26 funds. The following year, our client base grew to 47. We’ve been very active in the recent months and expect to see our portfolio expand to over 70 funds by the year’s end.
Why is separating depositary and custody services important for crypto funds? How does it benefit investors?
First of all, we should mention that the Luxembourg Financial Sector Supervisory Commission (CSSF) guidelines allow for basically two options regarding the depositary/custody setup. In the first option, the depositary function and crypto custody function are performed by the same entity, while in the second, the depositary and crypto custody roles are performed by independent actors.
We believe that our setup [the second one] is stronger as it allows increased oversight, leading to greater security for the investors, adding an additional pair of eyes ensuring the security and safety of investments, which is a crucial factor, particularly for institutional investors. It should also be noted that the one-stop-shop approach may lead to unwanted conflicts of interest which can only be successfully mitigated by the independence of players responsible for depositary and crypto custody duties.
As digital assets are qualified as ‘other assets,’ the crypto custodian is appointed directly by the AIFM
What operational challenges do you see in keeping custody and depositary services independent in the crypto space?
The crucial aspect of keeping custody and depositary services independent in the crypto space is ensuring smooth cooperation and exchange of information between the independent actors providing those services, particularly that from a legal perspective. The crypto custodian is not a delegate of the depositary like in the case of traditional securities, but rather an appointee of the alternative investment fund manager (AIFM).
As digital assets are qualified as ‘other assets,’ the crypto custodian is appointed directly by the AIFM. There is no requirement for the depositary to have an agreed framework of cooperation with the crypto custodian. That is why we went a step ahead of what is required by the regulator and agreed on a framework agreement with Sygnum Bank--our main partner in the crypto custody space--which ensures that we are closely working together on the safekeeping side of things related to digital assets, which helps minimise operational risks which are of particular importance for this asset class.
How can Luxembourg’s financial reputation give it an edge in the crypto fund market?
As clients perceive the digital assets class to be more volatile and risky than other ‘classic’ asset classes, Luxembourg’s reputation as a fund domicile can help attract investors, for whom the quality of Luxembourg’s regulatory framework and the strength of local service providers are factors mitigating these risks. In that regard, Luxembourg’s decision to adopt a cautious approach to the development of crypto funds can be assessed positively, as it ensured that if and when crypto funds are set up with the Luxembourg flag, they are managed by entities, which are well equipped to handle the challenges brought on by the specific nature of this asset class. With the upcoming implementation of markets in crypto-assets regulation (Mica), we expect Luxembourg’s ecosystem to develop further, allowing Luxembourg to become the first choice jurisdiction also in the crypto space.
we are the first depositary servicing a Luxembourg crypto fund but more players are needed to make sure clients wishing to set up funds investing in digital assets have options to choose from
In what ways does Luxembourg’s legal and financial infrastructure support institutional interest in crypto?
From a legal perspective, the critical step in developing Luxembourg’s framework for digital asset funds was the publication of the CSSF’s guidelines concerning investments in virtual assets, which happened in November 2021. Since then, the infrastructure required for setting up and managing crypto funds has been developing slowly as the CSSF required fund managers to obtain a special type of license to manage digital assets. The last piece of the puzzle was the approval of our partner 6Monks as the first third-party AIFM allowed to manage crypto funds, which made possible the set up of first Luxembourg funds investing in digital assets.
The availability of institutional-grade services will be a crucial factor in the ongoing development of crypto funds in Luxembourg, as institutional clients typically are hesitant to invest in unregulated products, seeking safety and security brought on by regulated funds.
What steps does Luxembourg need to take to become Europe’s leading hub for crypto funds?
The key obstacle for Luxembourg to overcome to make it Europe’s leading hub for crypto funds is the insufficient pool of service providers able and willing to support the development of funds investing in digital assets. We are proud that we are the first depositary servicing a Luxembourg crypto fund, but more players are needed to make sure clients wishing to set up funds investing in digital assets have options to choose from.
After all, if a promoter wants to set up a fund investing in nearly every other asset class, they have a variety of fund managers, administrators and depositaries to choose from. In contrast, in the crypto space the choice is still quite limited.
Read also
From a securities perspective, what new products or services could Luxembourg develop to attract more institutional interest?
Luxembourg’s position as a first-choice fund domicile results from a concerted effort from lawmakers and regulators to service providers in the grand duchy to stay on the edge of constantly developing financial markets. Aside from the crypto space, we are happy to observe the work done to ensure that every new product introduced at the EU level, like European long-term investment funds (Eltifs) has a fully developed regulatory framework and ecosystem of service providers helping support fund promoters who want to reach a global audience.
Looking to the future, we believe that the next revolution in the fund industry may be the adoption of asset and fund unit tokenisation, using distributed ledger technology (DLT) and blockchain technology to ensure even smoother fund operations, while decreasing the paperwork required to invest in all types of investment strategies.
Are the current regulations in Luxembourg enough to make both institutional investors and smaller fund managers feel secure?
As regulations concerning the setup and management of crypto funds are not harmonised at the EU level, it is up to each member state to develop its own regulatory framework covering these areas. We believe that the guidelines issued by the CSSF--along with some excellent working documents published by market associations, like LetzBlock, of which Q Securities is a member--provide more than adequate regulatory foundations for developing crypto funds in Luxembourg.
What is needed is further growth of the sheer numbers of players forming Luxembourg’s ecosystem supporting these funds and perhaps the regulator could help these service providers which are hesitant to enter the crypto fund space by making the licensing process more transparent and efficient.